Budget 2022: Is it worth being ‘fiscally’ fit right now?

Budget 2022 & Fiscal Deficit: Over 2 decades after India put the spotlight on fiscal fitness and health the question that continues to haunt North Block is how critical are fiscal targets now.

Before we go ahead it is important to go back and dissect what is fiscal fitness and why the fiscal deficit is such a talked about term.

It was the year 2000 and ruling the roost at North Block was Yashwant Sinha, when the much talked about Fiscal Responsibility act came into existence. Implemented just three years later the mantra and mandate was clear– keep your spending in check!

So what is a fiscal deficit? To put it simply it is the difference between what the government earns (or gets in revenue) and what the government spends. And as the government spends far more than it gets in revenue from taxes et al the shortfall is called the fiscal deficit.

So the next question is where does the money really come from to spend and how do does the government make up for the shortfall?

The main source of revenue for the government is taxes you and I as well as companies and business pay. When we say taxes not just income tax but also service tax, liquor tax even host of duties on different products such as petrol and diesel. But spending far outpaces revenue for the government. To put it in perspective, let us take the year 2019 (before covid played havoc with the budget) - The govt estimated revenues amounted to while expenditure Rs 27,86,349 crore meaning there was a shortfall off 7 lakh crore.

Now that’s no pocket change ..so where does this money come from..Simple just like you and me the govt borrows! Yes it takes a loan! ..but they get it from their local banker – The RBI and yes just like any citizen or business they too have to pay interest. Infact the borrows by buying G-Secs or Treasury Bills from the central bank and in lieu pays interest. In fact the year before the pandemic 2019 The govt paid over Rs 6 lakh crore in just interest payments.

And as we all know loans and interest does not sit well for the health of any budget household or union which is why in the year 2000 the formed the Fiscal Responsibility Act which mandates by law for the government to keep it’s spending in check but as covid creates havoc with the economy will fiscal fitness continue to take a back seat. With a target of 6.8% also to be missed the bigger number to watch for is FM is willing to let go of the purse strings for one more year. That question will be answered on February 1st by the Finance Minister.